Chap015solutions2011 - Chapter 15 Leases Chapter 15 BRIEF...

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Chapter 15 - Leases BRIEF EXERCISES Because none of the four classification criteria is met, this is an operating lease. Accordingly, LTT will record rent expense for each of the four $25,000 payments, reducing its earnings by $100,000 each year. Because none of the four classification criteria is met, this is an operating lease. Accordingly, Lakeside will record rent revenue for each of the four $25,000 payments, increasing its earnings by $100,000 each year. In addition Lakeside, as owner of the asset, will record depreciation. Assuming straight-line depreciation of the $2 million cost over the 25-year life, that’s $80,000 depreciation expense each year. So, earnings are increased by a net $20,000 ($100,000 – 80,000). Because this is an operating lease, Ward will record rent expense for each of the $5,000 payments. The advance payment also represents rent, recorded initially as prepaid rent and allocated equally over the ten years of the lease. As a result, Ward’s rent expense for the year reduces its earnings by $70,000 each year. $5,000 x 12 = $60,000 $100,000 / 10 = 10,000 $70,000 The lease is a capital lease to Athens because the present value of the minimum lease payments ($20.4 million) is greater than 90% of the fair 15-1 Chapter 15 Leases Brief Exercise 15-1 Brief Exercise 15-2 Brief Exercise 15-3 Brief Exercise 15-4
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Chapter 15 - Leases value of the asset (90% x $22.4 million = $20.16 million). None of the other three classification criteria is met. The present value of the minimum lease payments ($20.4 million) is greater than 90% of the fair value of the asset (90% x $22.4 million = $20.16 million). Since the additional lessor conditions also are met, it is a capital lease to Corinth. Furthermore, it is a sales-type lease because the present value of the minimum lease payments exceeds the lessor’s cost ($16 million). In direct financing leases, the lessor records a receivable for the present value of the lease payments to be received ($2,500,000 for Sonic). The difference between the total of the lease payments ($3,292,000 for Sonic) and the present value of the lease payments to be received over the term of the lease represents interest. Over the term of the leases, Sonic will report this amount ($3,292,000 minus $2,500,000 = $792,000) as interest revenue, determined as the effective interest rate times the outstanding balance (net investment) each period. 15-2 Brief Exercise 15-5 Brief Exercise 15-6
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Chapter 15 - Leases The amount of interest expense the lessee would record in conjunction with the second quarterly payment at October 1 is $2,892: Initial balance, July 1 (given) .................................... $150,000 Reduction for first payment, January 1 .................... (5,376 ) Balance ..................................................................... $144,624 Interest expense October 1: 2% x $144,624 = $2,892 Journal entries (not required): July 1 Leased asset (given) .............................................. 150,000 Lease payable .................................................. 150,000 Lease payable ..................................................... 5,376 Cash (lease payment) .......................................... 5,376 Oct. 1 Interest expense (2% x [$150,000 – 5,376]) ................ 2,892 Lease payable (difference) ..................................... 2,484 Cash (lease payment) .......................................... 5,376 The amount of interest revenue the lessor would record in conjunction with the second quarterly payment at October 1 also is $2,892 , determined in the same manner.
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